Ask any 5-year-old why blowing bubbles is fun, and he'll tell you: You get to pop them. For adults, blowing economic bubbles is equally enjoyable. It's easy to get swept up in the excitement of buying things we wouldn't normally consume because we think they'll be worth more later. But when the market gleefully pops them, it hurts.
When the Internet bubble burst, it showered the country with corporate-owned foosball tables, absurd job titles, and unemployed gen-Xers. Some of the people who were hit the hardest were those of us who had been more accustomed to putting money into mutual funds than picking individual stocks. We bought Internet equities we wouldn't otherwise have purchased. We estimated that regardless of how high the absolute price was, or how expensive it was relative to the company's projected cash flow or earnings, the stock was only going to go up and could be sold to someone else at the higher price. But market prices did what they always do when there's a chasm between the going rate and the actual value of the asset: They crept--then sprinted--downward.
We saw this more recently with the late-summer credit crisis, which, at this writing, is still beating up institutions and consumers. (Perhaps by the time you read this, the debt market's violent hostility will have been downgraded to the occasional uncomfortable wedgie.) Because we perceived credit to be cheap, we took on more debt than we would ordinarily, buying real estate and expanding existing home equity through additions and renovations. Now we tell ourselves nervously that the Imelda Marcos--sized shoe closet and basement ice-hockey rink really did add to the value of the house, as we scan the horizon for any trace of a potential buyer.
In both cases, the mere existence of the opportunity became a major motivation in and of itself. We're only one evolutionary step away from the guy who buys three avocado peelers he'll never use because the infomercial indicated that they could be had for $19.95--the price of one!--and that it was a "limited-time offer."
Even high-net-worth investors who should have learned their lesson in these bubbles tend to ignore them when it comes to their nerdy collecting passions. Witness the bubbles floating through luxury markets. Demand for the jammy California cabernets currently in vogue for long-term cellaring and resale may disappear as drinkers inevitably get bored with that style. When that happens, Opus One will go back to being a composer's first work.
Haute-couture collectors buy exquisite (and exquisitely expensive) dresses for pleasure--and in the hope that they'll appreciate in value. But the haute-couture designation is an official one bestowed by the French fashion gods, and it's not terribly difficult to lose. Ask yourself what happened to Paco Rabanne next time you see his signature fragrance in the drugstore.
High-end watchmakers believe wrist candy will always be in style. "You never actually own a Patek Philippe," the company's slogan goes, "you merely look after it for the next generation." Too bad the next generation, with its time-telling mobile devices, sees the wristwatch as an anachronism on par with the sundial. Or Paco Rabanne.
In the meantime, anyone who's interested in buying assets in any of these markets can drop me an email. I'm sure I can find a Beanie Baby somewhere to loan you, just as a reminder of what can happen.
Elizabeth Spiers was the founding editor of both Gawker.com and Dealbreaker.com. Her first novel, And They All Die in the End, will be published by Riverhead.